Trade War Fuels Global Risks, Central Banks Mull Rate Cuts

The trade war poses risks to global economies, prompting central banks, including the US Fed and ECB, to consider rate cuts. China faces challenges despite the stimulus, while Thailand’s GDP growth may decline.

Key takeaways

• Escalating global trade tensions are increasing recession risks and prompting central banks to consider rate cuts to stabilize growth.
• The Fed remains cautious despite signs of a cooling U.S. economy, while the ECB has already begun easing amid mounting Eurozone pressures.
• China and Thailand are relying on stimulus and diplomacy to counter trade shocks, but long-term risks remain without deeper structural solutions.

The intensifying trade war among the world’s major economies is stoking fears of a broader global economic slowdown, prompting central banks to consider interest rate cuts to maintain stability.

Rising tariffs, disrupted supply chains, and policy uncertainty have pressured global markets, with export-dependent economies in Asia and Europe facing heightened downside risks.

In the United States, the Federal Reserve has signaled a cautious stance, with Chair Jerome Powell noting the central bank is in no rush to lower interest rates. 

This comes despite signs of a cooling economy, first-quarter GDP projections from the Atlanta Fed were revised sharply downward to a 2.2% contraction, and the Philadelphia Fed’s manufacturing index dropped to -26.4 in April.

Consumer confidence has also declined amid concerns that new tariffs may push inflation further from the Fed’s 2% target. Nonetheless, analysts, including Krungsri Research, anticipate a rate cut by mid-2025, with the Fed Funds rate expected to fall to 3.50–3.75% by year-end.

Meanwhile, the European Central Bank (ECB) has already moved to ease policy, cutting its key deposit rate by 25 basis points to 2.25% in response to weakening economic indicators. 

The Eurozone’s April ZEW Economic Sentiment Index dropped to -18.5, its lowest since December 2022, while inflation remains muted. With the US planning new tariffs on European medical exports, risks to the Eurozone’s recovery have increased, prompting expectations of further rate cuts to 1.75% by year-end.

China has shown solid first-quarter growth of 5.4% year-on-year, aided by state stimulus. However, renewed tariffs up to 145% from the US and 125% in China’s retaliation pose significant risks. 

Export momentum may fade, especially as youth unemployment remains elevated at 16.5%. Authorities are likely to intensify fiscal support to meet the government’s 5% growth target for 2025.

In Thailand, twin shocks from US tariffs and a March earthquake are pressuring the economy. While the Bank of Thailand has maintained rates for now, further cuts are expected if headwinds persist. 

The Thai government is actively negotiating with the US to reduce trade tensions, including proposals to cut its trade surplus over five years.

As global trade tensions mount, central banks are increasingly leaning toward monetary easing to cushion the impact. 

However, experts caution that rate cuts may only provide temporary relief without structural solutions to the root causes of the trade disputes.